Question

Westerville Company reported the following results from last year’s operations: Sales $ 1,200,000 Variable expenses 320,000 Contribution margin 880,000 Fixed expenses 640,000 Net operating income $ 240,000 Average operating assets $ 600,000 At the beginning of this year, the company has a $150,000 investment opportunity with the following cost and revenue characteristics: Sales $ 240,000 Contribution margin ratio 50 % of sales Fixed expenses $ 84,000 The company’s minimum required rate of return is 15%. Required:

a. What is last year’s margin?
b. What is last year’s turnover?
c. What is last year’s return on investment (ROI)?
d. What is the margin related to this year’s investment opportunity?

Answer 1

Answer:

1) Last years' margin = Net operating income÷ Sales    

                              =  240,000÷1,200,000

                              = 0.2= 20%

2) Last years' turnover = Sales ÷ Average operating assets

                                       = 1,200,000 ÷ 600,000

                                        = 2

3) Last years' return on investment = Margin ratio × turnover ratio

                                                             = 20% × 2 = 40%

4) Margin for this years' investment = Net operating income ÷ Sales

                                                           = 36,000 ÷ 240,000

                                                           = 0.15 = 15%